Creating a cost offset narrative early is essential for deal making in assets with infrastructure issues such as Psychedelics and Cell Therapies

5 minute read

by Ralph Hughes, Vice President, PharmaVentures.

What is a cost offset narrative?

A key economic principle that all healthcare systems are founded on is the concept of opportunity cost. In an efficient system, if costs can be reduced without sacrificing quality (safety and efficacy), it is a benefit; and if the quality can be improved as well, it is even better. The term “cost offset” is a commonly used phrase for this underlying principle.

Payers, especially those focused on the value for the entire system, will consider these cost savings and balance them against the cost of a medicine. Having a robust cost offset story and data can help justify a higher price.

There are two ways medicines can create cost offsets:

1. A treatment that creates efficiencies in the care pathway. A good example of this is a recently launched antibiotic, dosed weekly, that replaces the need for daily outpatient IV administration of vancomycin by a nurse. The cost of the avoided outpatient administration can therefore be added to the cost of the drug to come to reach a premium price.
2. A treatment that brings improvements in efficacy or safety thus reducing downstream costs. A good example of this is the oral anticoagulants like apixaban and rivaroxaban that replaced warfarin. Better control of clotting in atrial fibrillation prevents costly downstream events like stroke and the associated disability.

By comprehending the expenses that payers are concerned about, constructing a compelling narrative around cost offsets, and gathering data to back it up, the value proposition, pricing, and positioning of a drug can be enhanced. This also enables a developer to understand how perceptions towards the drug may evolve, giving them a solid bargaining power when dealing with major pharmaceutical companies.

How can cost offsets help drugs with infrastructure challenges?

The Chief Medical Officer from a large US Accountable Care Organization (ACO) offered a noteworthy illustration of this concept. They described the evolution of attitudes towards CAR-T therapy as the understanding of its potential cost offsets has changed:

• “When CAR-Ts were first launched; there was the issue of infrastructure, so not only was there the price of the drug at $600k but also the cost of the associated procedure.” This was a problem that they could fairly rapidly be overcome however: “We managed to get them [CAR-T] reclassified as transplants and we now do them ourselves at specialist centres, so now we are only negotiating the cost of the drug.” And already we can start to see how, when payers are motivated the right way, they can find ways to overcome barriers.

• Reclassification or not, CAR-Ts are still very expensive. But the payer went on to explain how, with the emergence of sufficient durability data, she is now starting to see CAR-Ts as a way to avoid cost: “I have a patient with multiple myeloma who has undergone six or seven lines of treatment, including a bone marrow transplant, and already cost me $1.7m. So now I am asking the question: why not do the CAR-T at second line? CAR-Ts cost $600k a pop, which is a lot of money but if it could spare me some of that $1.7 million, then it is good news.”

• This is also good news for manufacturers, because earlier lines of therapy mean more patients; more patients mean greater economies of scale; and greater economies of scale means the potential for the same profit at reduced prices. The very definition of a virtuous cycle.

For this payer, we can see that the cost offset discussion has become an issue of the total cost of care, not just the cost of the medicine: “I want to map the patient journey and the total cost of care and put CAR-Ts where they can have the greatest impact… It is the providers who are the challenging ones, not the payers in this situation.”

Lessons for another drug class with infrastructure challenges: Psychedelics.

The issue of infrastructure is a particularly sticky one for psychedelic treatments, as the cost of patient care, such as observation and counselling, will likely be covered through fixed fees or Diagnosis-Related Group (DRG) systems. DRGs assign a pre-determined tariff for each inpatient “episode of care,” which serves as the reimbursement amount for the centre providing the care. If a hospital is able to deliver the DRG at a lower cost than the tariff, they keep the difference. On the other hand, if the cost exceeds the tariff, the hospital bears the additional expense.

According to the vice president of a major US Pharmacy Benefit Manager: “Most psychiatry offices are not set up to do very much medical stuff, the don’t have space for this kind of thing.” This sentiment was echoed by a payer from an ACO who stated, “There is a [psychedelic treatment] where you have a provider talking to the patient and monitoring the patient for like 5 hours or something. And I said no one’s going to do that. And my value-based system when I pay these people capitation [fixed fee], no one is going to do that.”

The DRG system means that clinics will receive reimbursement for an episode of treatment e.g., for depression, they will not be reimbursed for any extra time they spend with the patient or the specific drugs they use. This creates an incentive for clinics to deliver care as cheaply and as quickly as possible and then discharge patients on generic medications which will be paid for by the insurer.

“Spending 4-5 hours monitoring a patient, in addition to the cost of the drug, will be difficult to justify,” the insurer said, emphasising that “the fee schedule would have to be adjusted to allow for that kind of therapy to occur.”

What is noteworthy is that the challenge isn’t solely about the cost of the drug, but also the cost of delivering care. The ACO payer suggested that psychedelic treatment could only be feasible “after hospitalisation for suicide to get the patient started and then transition.” This, she believed, was the only opportunity to provide the treatment, as it requires sufficient time and the patient population is small enough.

So how can cost offsets be applied to psychedelics to overcome these issues?

Interestingly, it is this final payer comment that provides a potential solution to the infrastructure issue. Just as with CAR-Ts, it may be possible to reframe the issue in terms of cost offsets, for example, Psychedelics should be used initially for suicide prevention in a more severe patient population:

1. The cost of avoiding hospitalisation is potentially high. If these drugs could be demonstrated through RWD, budget impact analysis and cost-effectiveness modelling to avoid this cost, this would be immensely valuable to a value-based health system like an ACO.
2. Through measuring quality of life outcomes, it is possible to identify the benefit of suicide prevention to those patients who would have committed suicide and help us to understand the willingness to pay for preventing this outcome.
3. A lot of development in psychedelics persists in targeting MDD; while this might be the biggest and easiest population to demonstrate efficacy in, it is not the population that it will get used in initially. Just like the CAR-T example, focussing on more severe lines of therapy, e.g., treatment resistant depression or high risk suicide cases initially, demonstrating the cost benefit here, could lead to progression to earlier lines of therapy over time.
4. Just as CAR-Ts have been re-classified as transplants, it is possible to work with payers to try to find a way to reclassify the procedure associated with psychedelics to enable greater willingness to pay for patients in earlier lines of therapy.

Why are these issues important at the early stage?

Pharmaceutical companies are aware that no drug is the perfect solution its creators envision it to be. All drugs must navigate the complex and ever-changing healthcare system with its distorted incentives and unclear funding pathways. It is the responsibility of pharmaceutical companies to manoeuvre these obstacles. Early drug developers must understand this if they hope to attract pharmaceutical companies to partner or license their product. Drugs that rely solely on their efficacy and safety to justify their price are likely to face difficulties due to the intense competition, numerous generic options, and pressure on the system. According to Deloitte: in 2020, nearly 40% of drugs that failed to meet projected expectations did so due to inadequate market access.

Understanding payer attitudes, funding pathways, and establishing a persuasive cost offset narrative can help drug developers proactively address partner’s market access and pricing concerns. This will give confidence to potential pharmaceutical partners that they will be able to secure a favourable price and market access when bringing the drug to market.

Find out more about Pricing and Market Access from our website or contact us.